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The persistence of regional new business formation-activity over time – assessing the potential of policy promotion programs

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Abstract

We investigate regional differences in the level and the development of regional new business formation activity. There is a pronounced variance of start-up rates across the regions. The level of regional new business formation is rather path-dependent so that changes are relatively small. The main factors determining the level of regional start-ups are innovation and an entrepreneurial climate. These factors also seem to be responsible for changes in the level of regional new business formation. In addition, unemployment plays a role. Steering innovation and creating an entrepreneurial atmosphere could be an appropriate starting point for policy measures that try to promote start-ups. Our empirical evidence strongly suggests that such measures may have significant effect only in the long run.

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Notes

  1. The term new business is used as the overall category for both new firm headquarters and new plants since the dataset does not differentiate between these two categories of new entities.

  2. The definition of the planning regions from the year 1996 was used for the whole period to correspond with the late period in the data base. This enabled a consistent empirical framework between the two time-periods analyzed in this paper. For this definition of the planning regions see Federal Office for Building and Regional Planning (Bundesamt für Bauwesen und Raumordnung, BBR) (2003).

  3. The reasons for these two increases are largely unclear. It would not be very farfetched to suspect that the rise of the number of start-ups between 1990 and 1991 was caused by the unification of East and West Germany in the year 1990. However, we could not find any further indication for this hypothesis in the data. The rise between 1997 and 1999 coincides with a change of the sector classification system of the Social Insurance Statistics, but again, it remains unclear how this change could have affected the number of start-ups that was recorded.

  4. This high correlation is in no way surprising since R&D employment according to our definition—personnel with a tertiary degree in engineering and in natural sciences—constitutes a subgroup of the employed persons with a university degree.

  5. The results of the Tobit regressions are available from the authors upon request.

  6. The differences as compared to models in which start-up rates and exogenous variables are for the same year are, however, negligible. This indicates that reversed causality (Granger 1969) does not appear to be a problem here.

  7. Applying a multi-dimensional approach that accounts for region-specific fixed effects, Fritsch and Falck (2007) found a positive relationship between the regional level of start-ups in the service sector and the share of persons which were unemployed for less than 1 year in the regional workforce. For start-ups in manufacturing, the short-term unemployment was not statistically significant. The share of people in unemployment for more than one year had no effect on new business formation activity.

  8. One may suspect that in regions with high unemployment a relatively large part of the start-ups has to be regarded as necessity entrepreneurship. However, since our data contain only start-ups with at least one employee subject to social insurance payments, sole self-employment firms which make a large part of the necessity entrepreneurship are not included.

  9. Perhaps, this conclusion should be qualified by pointing out that the effects of public policy programs, that are aiming at promoting start-ups in certain regions, were not investigated. Therefore, the finding that changes of the regional level of new business formation activity are small and slow should not be misconceived as an evaluation of the effectiveness of such policies. There were quite a number of such policies in operation in the period under review on the national level as well as in a number of regions. Obviously, these policies did not lead to any quick and large changes of the level of new business formation activity.

  10. For a more detailed discussion with regard to entrepreneurship policy see Lundstroem and Stevenson (2005). Howells (2005) and Toedtling and Trippl (2005) demonstrate this rather clearly for the case of innovation policy.

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Acknowledgement

We are indebted to two anonymous referees whose comments and suggestions have been very helpful in improving our argument.

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Correspondence to Michael Fritsch.

Appendix

Appendix

Table 5 Correlation matrix of start-up rates 1984–2002

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Fritsch, M., Mueller, P. The persistence of regional new business formation-activity over time – assessing the potential of policy promotion programs. J Evol Econ 17, 299–315 (2007). https://doi.org/10.1007/s00191-007-0056-6

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